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3 Tax Options to Offset Child-Care Costs

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3 Tax Options to Offset Child-Care Costs

Sandra Diaz

Paying for child care can take a big chunk out of a paycheck – sometimes it’s the largest household expense for working families. Even more than housing, college tuition, transportation, or food. According to Child Care Aware of America, the average cost to send an infant to a licensed day care center in California is $11,817 annually – that’s around 14% of a married couple’s income and 45% for a single parent. That’s 29% more than one year’s tuition at a four-year public California college. Plus, if you have school-aged children, you’re most likely paying for before- and/or after-school care and summertime camps so you can go to work.  

Fortunately, parents have some options to help alleviate the costs. You’re not going to recoup all of your costs; there’s a limit on how much you can claim. You’ll also need to make sure you (and, if applicable, your spouse), your child, and child-care arrangements meet the eligibility requirements.

Options for Working Parents

1.    Child and Dependent Care Expenses Tax Credit
It’s a federal tax credit that helps to reduce your tax bill dollar-for-dollar. The IRS allows you to claim $3,000 for one child and $6,000 for two or more. Then, you receive a percentage, ranging from 20% to 35%, of that amount based on your income as a credit. If your company gives you a day-care allowance or you use pre-tax dollars from your paycheck to pay for child care, you’ll have to deduct from the allowable amount.   

2.    California Child and Dependent Expenses Tax Credit
If you qualified for the federal tax credit and your federal adjusted gross income is less than $100,000, you can claim a percentage of the federal tax credit on your California tax return. The percentage ranges from 34% to 50%.  

3.    Dependent-Care Flexible Spending Allowance
Money is withdrawn from your paycheck before payroll taxes are deducted and those funds are deposited into a spending account. Then, the parent submits eligible expenses for reimbursement. The benefit of a Flexible Spending Allowance (FSA) is reduction of your taxable income so you take home more money.

Many companies offer this benefit to their employees and will set up the FSA for you. The company determines the minimum and maximum amount you can contribute. However, the IRS caps the maximum at $5,000 for an individual or married couples filing jointly, or $2,500 per person if a married couple files separately. It’s important to carefully estimate how much you’ll spend on child-care expenses for the year. Any money that you don’t claim in the time period established by the company is forfeited. Talk to your Human Resources Department about the details and any eligibility requirements.

This information should not be construed to be advice regarding how to prepare your taxes. Please talk with your tax professional with questions you may have or for more information about these deductions and credits.